There IRA has become an incredibly popular retirement tool, particularly the Roth IRA variation. So, when do you pay taxes on a Roth IRA? Let’s take a look.
The Roth IRA is a fairly recent development in the retirement platform area. It is another step by the government to try to motivate citizens to set aside money for the future. This is particularly pertinent given the fact that 2010 represents the first year that the social security program will take in less money than it pays out in benefits. Since the government has borrowed the yearly surplus the program had for the past few decades, this is the beginning of a fundamental change in the retirement situation in the United States.
To understand when you pay taxes on a Roth IRA, you need to understand how the work. The Roth is similar to a basic IRA. The difference between the two is entirely related to a shift in the tax burden. With a regular IRA, you pay taxes when the money is distributed to you during the retirement period. With a Roth IRA, you use after tax money to fund the plan and then do not have to pay income tax when distributions are made.
Funding a normal IRA can either be done with pre-tax income or end up giving you a deduction. The Roth IRA does not convey such a benefit. You pay with after tax money. While there is no benefit up front, you get a huge benefit on the back end when money starts coming out tax free.
I would be remiss if I didn’t mention a long term concern regarding the Roth IRA. There are many legal and financial professionals that have serious doubts about the long term validity of the Roth. The specific concern is that the government will eventually start taxing the distributions. People are concerned because the federal government current has a $12 trillion dollar deficit, but few realize it is facing $60 plus trillion in unfunded liabilities over the next 30 years. It is going to have to find some way to pay for that debt and there is a huge pool of retirement money that would just do the trick!
To understand when you pay taxes on a Roth IRA, you need to understand how the work. The Roth is similar to a basic IRA. The difference between the two is entirely related to a shift in the tax burden. With a regular IRA, you pay taxes when the money is distributed to you during the retirement period. With a Roth IRA, you use after tax money to fund the plan and then do not have to pay income tax when distributions are made.
Funding a normal IRA can either be done with pre-tax income or end up giving you a deduction. The Roth IRA does not convey such a benefit. You pay with after tax money. While there is no benefit up front, you get a huge benefit on the back end when money starts coming out tax free.
I would be remiss if I didn’t mention a long term concern regarding the Roth IRA. There are many legal and financial professionals that have serious doubts about the long term validity of the Roth. The specific concern is that the government will eventually start taxing the distributions. People are concerned because the federal government current has a $12 trillion dollar deficit, but few realize it is facing $60 plus trillion in unfunded liabilities over the next 30 years. It is going to have to find some way to pay for that debt and there is a huge pool of retirement money that would just do the trick!